While TaxaBall has p﻿revious﻿ly det﻿ailed how the “jock tax” works, the general “jock tax” calculation is relevant for this discussion and repeated below.

“Jock Tax” OverviewLike all US citizens, professional athletes must pay both federal and state income taxes. However, under what is commonly referred to as the “jock tax”, professional athletes pay state income tax in each state they play. The legal theory is that you are required to pay state income taxes in the state you earn that income and thus the professional athletes earn income in the stadiums they play in each season. But how much income does an athlete “earn” in each state? Does a player earn their money only by playing games or do they earn their money when practicing, making media appearances, off-season workouts, etc.?

To solve this problem, states have generally adopted what is known as the “duty day” method to calculate how much income athletes earn in their state. This method is calculated as the percentage of duty days spent in the respective state compared to the total duty days that athlete had that season multiplied by the player’s salary.

A duty day is generally defined as a day when an athlete participates in any form of team activity. This includes official offseason workouts, playoff games, preseason games, travel days, team media appearances, etc. While the duty day method is used by most states, it is not used by all states. For example, Tennessee used to charge a flat fee for their “jock tax”, and Cleveland, OH currently utilizes a “games played” method. Arizona, as detailed below, is another state who uses a unique approach to calculate how much income is earned by professional athletes in Arizona. Arizona’s “Duty Day” ApproachInstead of defining a duty day as any day when an athlete participates in any form of team activity, Arizona defines a duty day as “all days during a taxable year from the beginning of a professional athletic team’s first regular game of the season through the last game in which the team competes.” While calculating duty days from the first regular season game may not seem significant, this small change in calculation didn't happen by mistake. To understand why, it is necessary to understand the history of professional sports teams in Arizona. States did not begin to focus on professional athletes as a large source of tax revenue until the 1990’s. Arizona, in particular, didn't provide the regulation quoted above until 2001. At the time Arizona implemented this regulation, they were quite inexperienced with taxing professional athletes. Unlike California who had already been taxing professional athletes for decades, Arizona had only had an MLB team for 3 years, an NHL team for 5 years, an NFL team for 13 years and their NBA team for a little over 30 years. So why would a state with little experience taxing professional athletes create a regulation so specific?

As far back as the 1929 Detroit Tigers, MLB teams have been conducting Spring Training in Arizona. In 2000, when this rule was being considered, all 30 MLB teams conducted spring training in only two states - Florida or Arizona. Of course Florida doesn't collect income tax at all. Therefore, had Arizona decided to adopt the traditional duty day calculation that most states have adopted they would be collecting 4.54% of every MLB player’s salary during spring training while teams training in Florida would have been playing tax free. Fearful that players and teams would move their spring training locations to Florida (or another state that doesn't charge income tax e.g. Texas), Arizona valued the economic impact that spring training brings them over the economic impact taxing MLB player’s salaries would bring Arizona.

This is a big win for MLB players because regardless of which team they play for, they are not taxed for state income taxes on at least 20% of their salary each year. How big of an impact does this Arizona regulation have? Had Arizona taxed the 15 MLB teams that have Spring Training in Arizona they would have received an estimated $14MM in tax revenue in 2013. To the right is a list of the MLB players who will save the most money by Arizona not taxing income earned in Spring Training.[1]

Today, the biggest names in the music industry will gather at the Staples Center for the 57th Grammy Awards. Two weeks later, the film giants of the world will congregate nine miles down the road for the 87th Oscars (aka the Academy Awards) at the Dolby Theater. While both of these award ceremonies will have a large variance in attendees, one attendee will be VIP at both - the IRS.

The reason for the IRS's attendance at both is due to another common guest of both ceremonies - Distinctive Assets. Since 1999 the company Distinctive Assets has put together gift bags which are handed out at both of these ceremonies. Today, the popularity and value of these gift bags has skyrocketed. A gift bag at the Grammys this year is expected to be worth $25,000 and the Oscars gift bag is worth $168,000.

This means if you are a lucky recipient of a gift bag you could owe $13,225 in taxes for a Grammys gift bag and $88,653 in taxes for an Oscars gift bag.

This equates to a big day for taxing authorities. Approximately 121 individuals will receive an Oscars gift bag and approximately 473 individuals will receive a Grammys gift bag. For the IRS and California FTB that equals a $6.26M payday from the Grammys and a $10.73M payday from the Oscars. [2]

The IRS isn't shy about announcing their presence at these award shows either. Since 2006, the IRS and AMPASreached an agreement that requires the Academy Awards to include with the gift bags any applicable tax forms as a reminder of the tax due.

The actors and actresses aren't at a total loss; they can follow George Clooney’s footsteps and donate their gift bag to charity and receive a tax deduction for doing so. However, given the amount of income movie and music stars make, it is unlikely they will be able to utilize much of that tax deduction.

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Today the Ohio Supreme Court will be hearing oral arguments for two “jock tax” cases. If you don’t know much about the “jock tax”, this article gets a bit technical so you may want to read about how the “jock tax” works first. Here is everything you need to know for these cases.

The dispute is in regards to how Cleveland assessed income tax on these two former NFL players.

Both of these cases, while separate cases, share the same theme which is an opposition as to how Cleveland assesses income tax on nonresident professional athletes.

Under Ohio law, a municipal tax organization is disallowed from assessing income tax on nonresident individuals unless that nonresident has been in that municipality for more than 12 days. However, that law exempts professional athletes and entertainers from this 12 day requirement. This allows municipalities to tax professional athletes even if they are only in the city for one day. For example, an NFL player who only plays one game at the Cleveland Browns would be subject to income tax for that game’s paycheck instead of Cleveland only being able to tax that player if he worked in Cleveland for 12 days during the tax year.

Additionally, most states who tax nonresident professional athletes generally decide how much of that athlete’s income is subject to taxation using the “duty-day” apportionment method. However, Cleveland uses the “games played” apportionment method. This method assigns your income to a state based on the number of games you played in Cleveland divided by the numbers of games you played in the entire tax year. For NFL players visiting Cleveland the “games played” method would allow Cleveland to tax 6% of a player’s salary while the “duty days” method would allow Cleveland to only tax around 0.6% of that player’s salary. By Cleveland using the “games played” method, they were able to tax up to 420% more of Hillenmeyer’s salary in 2006 than they would have under the “duty-day” method.

Hillenmeyer and Saturday are raising the following arguments in their case against Cleveland:

The “games-played” method violates the U.S. Constitution’s Commerce Clause.

Cleveland exempting everyone from municipal tax unless they have worked in Cleveland for 12 days – with the exception of professional athletes and entertainers – violates Ohio’s Constitution and the U.S. Constitution’s Equal Protection clause.

The Players Association for the MLB, NBA, NFL, and NHL have all filed an Amicus Curiae brief together in support of Hunter Hillenmeyer’s position in this dispute.

Jeff Saturday’s case raises two additional issues. Saturday actually never went to Cleveland to play against the Browns! He was injured for four games of the 2008 season. One of those games was against Cleveland and he stayed in Indianapolis to rehab instead of going with the team to Cleveland. However, Cleveland required the Colts to withhold income tax from Saturday’s check for that game “played” in Cleveland. Because of this, Saturday raises the two following issues:

Cleveland taxing nonresidents who never perform a work or service in the city violates the U.S. Constitution’s Due Process and Commerce Clause.

Cleveland taxing nonresidents who never perform a work or service in the city violates the Ohio and Cleveland law.

If you wish to research the topic further, you can read official oral arguments previews of these cases here. TaxaBall will provide updates with the case as they occur.